Cost of 401(k) Investing Continues Dramatic Decline

The 401(k) and the way it’s structured has taken some recent hits, with critics contending it’s complicated, expensive and the tax advantages just aren’t there.

But the cost of 401(k) investing, at least, continues its downward trend, according to new data from the Investment Company Institute.

ICI noted the cost of investing in equity and hybrid mutual funds through 401(k) plans, specifically, fell again in 2019. The report also shows that participants who invest in mutual funds in their 401(k) plans tend to hold lower-cost funds.

“The long-running decline in mutual fund fees in 401(k) plans demonstrates that plan sponsors and participants are cost-conscious investors in this vibrant, competitive marketplace,” Sarah Holden, ICI’s senior director of retirement and investor research, said in a statement. “Since mutual funds represent a significant share of assets held in 401(k) plans, this downward trajectory in fees benefits plan participants building their retirement nest eggs.”

Equity, hybrid expense ratios declined substantially

Mutual funds represented 63% of the $6.4 trillion in 401(k) plan assets at year-end 2019.

The average expense ratios that 401(k) plan participants incurred for investing in equity and hybrid mutual funds fell in 2019, while those for bond mutual funds increased slightly.

401(k) plan participants investing in equity mutual funds incurred an average expense ratio of 0.39% in 2019, compared with 0.42% in 2018 and 0.77% in 2000.

The average expense ratio that 401(k) plan participants incurred for investing in hybrid mutual funds fell to 0.46% in 2019, from 0.49% in 2018 and 0.72% in 2000.

The average expense ratio that 401(k) plan participants incurred for investing in bond mutual funds increased slightly from 0.34% in 2018 to 0.35% in 2019. However, this is down from 0.60% in 2000.

401(k) fund assets concentrated in lower-cost funds

In 2019, 401(k) plan participants incurred an asset-weighted average expense ratio of 0.39% for equity mutual funds, which was less than the industry wide asset-weighted average expense ratio of 0.52%. Further, this was about one-third of the industry wide simple average of 1.24% for all equity mutual funds offered in the United States in 2019.